Quality’s Role as Financial Officer – Can you speak $, €, £, ¥, CHF?

Apr 23, 2015

Why is it that Finance and Quality are seen as immiscible as oil and water? Rarely do you experience a financial discussion in a Quality meeting setting. Likewise, rarely do you see a cGMP compliance or quality discussion when the organization gets together to discuss budget. Having financial discussions with Quality professionals is generally linked to production volumes and the cost of the Quality organization as overhead. We all have the same goal of providing quality products to patients and wanting our companies to be successful, so why don’t we change the focus of the dialogue to also include how Quality can deliver financial benefits? At present, the traditional stereotypes of Finance and Quality professionals prevents us from improving financial results for the company. It’s now time to shift the dialog from a cost-based conversation to a value-based conversation. It’s time for a change!

The Language of Finance

Have you ever heard a conversation similar to the following one between the Head of Quality and the CEO?

Barbara, Head of Quality:“We are not compliant with 21 CFR 211.46 and need to put a couple of CAPAs in place to reduce our deviations in this area. I need to hire five more people in my area.”

Paul, CEO: “I am sorry, Barbara, but you know we have a fixed budget, and you really just need to manage this issue within your budget”.

Now, imagine the conversation with Barbara speaking the language of Finance.

Barbara: “We are losing 5% of our batches due to environmental monitoring excursions in our facilities, which are costing our company $28 million per year. Additionally, this is a compliance risk that we must address or run the risk of serious enforcement action. I think we should invest in hiring five more people, do a few design changes at a total cost of $3 million in CAPEX and an annual cost of $750,000. This would essentially eliminate the batch failures and the annual write-offs of $28 million.”

How do you think Paul, the CEO would reply? It’s obvious, isn’t it? So how do we move away from speaking different languages?

When we speak different languages there is a possibility of a message being misinterpreted, or as they say, “lost in translation,” which could then lead to a failure or error.

Well, we believe it all starts with Quality learning to speak the “language of finance.” But how do you do that?

Bringing Financial Visibility into Quality Operations

It sounds trivial but it all starts with understanding where the money goes, which can be thought of as a cost-of-quality model that provides the organization with the data needed to analyze the cost of “poor quality.”

We suggest something as simple as the following four categories: preventive, appraisal, internal and external failure costs.

Don’t spend a lot of time making it 100% accurate or comprehensive—it should be directional and an assessment of where to dig deeper. What expenses, costs and losses should be explored? It should help you identify the cost of quality activities like investigations, QC testing for batch release, validation, etc.

Armed with this data, you will be able to provide your organization a different perspective and prioritize quality, not only in terms of cGMP compliance gaps, but also in terms of financial opportunities. This is accomplished by educating the Quality organization and other relevant departments on these quality costs. Then, by incorporating this information into daily operational procedures, processes and documents, the organization will have complete picture. This education should go down to the shop floor level so everyone thinks about quality differently.

If employees at all levels have a foundation of quality compliance and understand that delivering safe products is the top priority, the addition of being aware of financial impacts can be a great benefit to the company. Suggestions made by those involved can be the most effective way to make improvements.

Compare Costs of Failure to Quality to Drive Value

Another strategy for disseminating the financial impact of poor quality is to include the cost of failures into deviation and investigations reports, including the number of hours investigations took (in terms of $, €, etc.) and the value of any rejected material (recommend using the market value). Compare these costs to the cost it would have taken to avoid the deviation. You will automatically drive the conversation from cost to value.

We know the costs of failed batches, write-offs, scrap, recalls, etc., but rarely do we speak about it during quality reviews as a means to look for improvement opportunities. Those reviews simply catalogue the number of recalls, investigations, etc., and notes trends. While these reports also help you link the causes to the failure, they fail to provide the financial link.

When decisionmakers link the cause of the failure with associated financial losses, allocating money to fix the issue is easier to justify. This information also helps the company determine where the compliance improvement would have the biggest financial impact. A common fact about these types of costs is that they often are not included fully into the budget and therefore hit finances directly.

Conclusion

The cost to react by far exceeds the cost to avoid an issue. According to PDA’s Business Case for Pharmaceutical Quality survey, more than 50% of respondents said that the cost of failure was at least five times higher than the cost of prevention, yet most companies choose to stay in the reactive mode. We need to make different choices here!

In the next issue, we will talk about teaching compliance in financial terms.

About the Authors

Jennifer Magnani is currently Head of Sanofi Pasteur Quality Academy and Leader of the PDA Quality System Interest Group.

Anders Vinther is Chief Quality Officer, Sanofi Pasteur. His experience includes QC, QA, executive and strategic management in a variety of cultures and a number of companies ranging from start-ups to large biologics companies.